Veradigm Inc (MDRX) 2010 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Allscripts third quarter 2010 earnings conference call. After the speakers' remarks, there will be a question and answer session. (Operator Instructions) I would now like to turn the call over to Seth Frank, Vice President of Investor Relations of Allscripts. Please go ahead.

Thank you, Tracy. This is Seth Frank, Allscripts Vice President of Investor Relations. On the call today are Glen Tullman, our Chief Executive Officer; Bill Davis, our Chief Financial Officer, and;Lee Shapiro, our President.

To start the call, I'll read the Safe Harbor statement and then I'll turn it over to Glenn and Bill. This presentation will contain forward-looking statements within the meaning of the Federal Securities laws. Statements regarding future events and developments, the Company's future performance, as well as management's expectations, beliefs, intentions, plans, estimates, or projections, relating to the future are forward-looking statements within the meaning of these laws.

These forward-looking statements are subject to a number of risks and uncertainties, including our ability to achieve the strategic benefits of the merger with Eclipsys, and other factors outlined from time to time, in our most recent annual report on Form 10-K, our earnings announcement, and other reports we file with the Securities and Exchange Commission. These are available at www.SEC.gov. The Company undertakes no obligation to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise.

Before I introduce Glen, just a brief note on our change in fiscal reporting periods. When we closed the Eclipsys merger, on August 24, we also changed our fiscal year end to December 31. This quarter's results are inclusive of Allscripts operations for the three months ended September 30, 2010, and Eclipsys' operations for the period from August 24, 2010 to September 30, 2010.

Now I'd like to introduce Glen Tullman, Chief Executive Officer of Allscripts.

Thanks to everyone for joining us today. I particularly want to welcome all of our new shareholders, employees and clients of Eclipsys, who are listening to the call, our first since the merger.

We have some exciting news to share. During the call today I'll cover our third quarter 2010 results, our progress on the merger integration, our competitive advantage, and the state of the market. Then I'll turn the call over to Bill Davis to cover the detailed financial results, our outlook for the remainder of 2010 and our guidance for 2011.

So let's go ahead and get started. This is an exciting time of change and opportunity in health care. The level of interest in our products continues to expand and as a result sales are accelerating. Our merger with Eclipsys represented a strategic move to provide our existing clients with a broader solution, and to grow our addressable market for new prospects. A market that McKinsey and Company recently estimated to be over $45 billion.

I'm pleased to report that clients and prospects like the expanded choice they now have, whether for a fully integrated offering or a best-of-breed solution that works well with what they have installed.

The real message is that health care wants and needs to connect. Our connected community of health has captured the imagination of the market, and leverages our network of 180,000 physicians in over 50,000 practices, 1500 hospitals, and over 10,000 post-acute and home care organizations.

Allscripts is especially attractive to those organizations that are focused on connecting with practices in their communities, whether affiliated or independent, as well as others who are creating accountable care organizations are managing quality and costs across the transitions of care. Some of you have raised questions about the recent elections. While the recent elections have caused concern about the future of health care reform, the good news is that funding for health care IT is a separate issue, signed into law in early 2009, and a non-partisan issue with support from both Democrats and Republicans alike. So we expect full speed ahead.

And the market is coming together faster than anyone could have imagined. You may have seen in the Wall Street Journal earlier today that the percentage of physician practices owned by hospitals has increased from 30% five years ago to 55% today. Evidence of how rapidly the market is consolidating. The bottom line is that our new Allscripts is positions perfectly for what's coming in health care.

The results are already starting to reflect the power of this combined organization. During the quarter, our team delivered on our key financial and operating metrics, in spite of the potential distraction and the extra effort required due to the merger. Total bookings were approximately $216 million, including $112 million from stand alone Allscripts. Solid results we were very pleased with. On a stand alone basis, Allscripts non-GAAP revenue totaled $191.7 million, demonstrating the continuing demand for our solutions. For the combined company, total non-GAAP revenue was $329.1 million for the third quarter, up 12% over the comparable period one year ago. And total non-GAAP net income for the quarter was $36.8 million, a 21% increase over the comparable period last year.

I'm also pleased to announce that in September Allscripts repaid $40 million of debt, reflecting the strong cash flow capability of our business. Bill will get into more detail, but we were pleased with our results and I'm really proud of the job our team did staying focused on the quarter as we work to bring Allscripts and Eclipsys together to form the new Allscripts.

At the time of the merger, we shared three key areas of focus -- strategy, sales and synergy. I've already discussed strategy and the fact that our clients are buying into our new vision. So now I'll comment on synergies. For cost synergies, the message is simple. We are on track to deliver the cost synergies of $25 million in 2011, $35 million in 2012, and $40 million in 2013, which we articulated at the time we announced the transaction. Specifically related to revenue synergies, we're already seeing evidence of our ability to cost sell our stand alone Allscripts and Eclipsys solutions into the combined client base. In fact, we signed one significant cost sale just two weeks after the merger was completed with Bronx Lebanon Hospital system in New York City, one of our premiere Sunrise clients. Bronx Lebanon will implement our care management solution which is being integrated into the Sunrise suite. You should expect to see a lot more of these cost sales in the future.

Earlier I mentioned the positive reception the merger is receiving. We had a perfect opportunity to hear from our clients at the Eclipsys user conference a few weeks ago, where we had over 1,500 attendees. Their response to the merger, and to the new innovations we announced at the conference for our Sunrise solutions, was overwhelmingly positive.

On a product front, as we told conference attendees, we are on plan to deliver integration between Sunrise and all of the Allscripts electronic health records by the end of the first quarter. In fact, during the conference keynote, we demonstrated native round-trip integration between our professional electronic health record and Sunrise. Just over one month post merger. Clearly, integration is and will continue to be a key focus for our clients and for us.

The takeaway is that we're ahead of schedule. But it's not just about integration. For example, clients want rapid installs. So we highlighted our Speed to Value implementation approach, which is increasingly important as hospitals look to maximize stimulus payment opportunities.

Just last week, we announced that United Hospital System in Wisconsin successfully activated multiple components of Sunrise with an on schedule big bang activation. On day one, they reported 100% of emergency department physicians were entering orders electronically.

Also at the conference, we saw strong continued client interest in our EPSI performance management solution, one of the hidden gems of Eclipsys. EPSI helps hospitals improve margins and efficiency. We continue to see good traction in the market, so you can expect to hear more from us about our EPSI solutions.

And we also used the conference to announce the availability of the new Allscripts developer program, which lets clients in third parties leverage our Helios open architecture platform to write and integrate their applications with Allscripts solutions. We also launched our new application store and exchange, which helps our clients protect their investment in third party applications and market their own proprietary development. This is the latest example of our commitment to open systems and open architecture, as opposed to the closed systems offered by some of our competitors. We already have several partners currently building integration on the platform, including Hill Rom, [Loftman] Healthcare, BIO-key and HDS, to name just a few. And we anticipate this approach will differentiate us from the competition.

The bottom line is that it's becoming increasingly clear that this was an industry transforming merger. Most notably the conversation has changed. Clients and prospects now see the new Allscripts in a new light as a Tier one recognized leader in the hospital, physician, and post-acute markets. Our open, flexible systems provide a viable alternative to the competition's monolithic offerings. The bottom line is that the market now feels there is a new, and in many cases, better option.

Already we're seeing evidence that the new choice is resonating with clients and prospects. For example, we have seen an a significant increase in RFP activity since the merger was closed. Validating the rationale behind the merger, during the quarter Mercy Memorial Hospital System selected our Sunrise acute suite, our professional EHR for their employed and affiliated physicians, and our discharge management solution. This agreement was in the works prior to the merger, but the merger sealed the deal for Mercy as their CIO, Bruce Kelly, put it, "Allscripts now represents the best of all worlds for our patients with acute, ambulatory and post-acute solutions all coming together."

The Mercy sale is also clear evidence of another key competitive differentiator and a sales driver in the most recent quarter for Allscripts. Our footprint of 50,000 physician offices using our solutions in the community which makes Allscripts the safe choice for hospitals subsidizing electronic health records for their affiliated physicians. During the quarter a number of examples demonstrated our traction with the Allscripts community model.

The first example is Catholic Health Care Initiatives, the nation's second largest Catholic health system. We expanded our existing agreement with their exclusive endorsement of our electronic health record and practice management solution for their 7,200 affiliated physicians. As a reminder, our prior agreement was for their 1,200 employed physicians.

Another example is Bon Secours, one of the nation's preeminent health care systems, who selected our MyWay EHR as one of only two EHRs built to provide for physicians affiliated with their Richmond, Virginia, health system. The other EHR is provided by Bon Secours' in patient vendor, Epic, and we're happy to compete with Epic, due to the strength MyWay has demonstrated with community providers.

A third example is St. Charles Health System, which selected our EHR for their employed physicians as well as for their 350 affiliated physicians. It's significant that this agreement includes a partnership with the Oregon Community Health Information Network, or OCHIN, Oregon's federally designated regional extension center. OCHIN also agreed in a separate agreement to resell our EHR to the more than 3,000 Oregon physicians they serve.

All of these examples are hospitals or health systems selecting our ambulatory EHR over, or in the case of Bon Secours, in addition to, that of their inpatient HIS vendor. This is a trend that we believe positions our suite of solutions to win future business from these hospitals as they look to replace legacy HIS systems.

On a more traditional EHR front, our largest sale this quarter was to Community Health Systems, or CHS, the nation's largest publicly traded hospital company, which selected Enterprise EHR for 900 of their employed physicians. This is a very significant agreement for Allscripts. Other major EHR sales to large hospital systems during the quarter included Catholic Health Care West, the eighth largest US hospital chain, which will deploy our EHR to 150 employed providers at the St. Joseph Medical Group in Phoenix. The agreement adds to our presence within Catholic Health Care West's employed physician groups across California.

One last area I wanted to highlight is the traction we're seeing with our Sunrise solution internationally. As an example, just after the quarter's end, Parkway Health in Singapore agreed to implement our Sunrise Enterprise suite in their four hospitals. In fact, our base of hospital clients in Singapore now represents approximately 70% of the market.

Two final comments before I turn the presentation over to Bill. First, less than 60 days from now, our clients will begin to capture the measurements needed to qualify for incentives under the ARRA high tech stimulus program. We expect to have all of our core EHR solutions, ambulatory and acute, ARRA certified before the end of 2010.

Second, I wanted to announce that Jeff Surges, our head of sales, will be leaving Allscripts to become the CEO of another non-competitive publicly traded health care company. It has always been Jeff's desire to run a public company, and this is a great opportunity for him.

As we begin our process to identify a new sales leader for the company, I've asked Steve Lalonde, who currently heads sales operations to lead sales on an interim basis effective immediately. Steve has been with the company for three years, held a number of leadership positions, and had a very strong sales history at Quaker Oats and RR Donnelley before joining Allscripts. I have a great deal of confidence in the collective sales leadership team as we close out the year.

So, with that as a foundation, I'll now ask Bill to provide you with more detail on the financials for the quarter, as well as our guidance for the rest of 2010, and for fiscal 2011. Bill.

Thanks, Glen, and good afternoon everybody.

As Glenn indicated, we could not be more excited with our performance this quarter. Key financial highlights from the quarter were, again, the completion of our merger with Eclipsys on August 24, and the related transition back to a December 31 year-end registration.

At the same time, both businesses continue to perform, meeting our internal expectations across all our key metrics, including bookings, revenue, and profit both on a stand-alone as well as on a combined basis. We also were able to generate meaningful cash flow in the quarter that enabled us to pay down $40 million of our outstanding debt prior to the end of the quarter.

Before I review the financial results in more detail, I would like to draw your attention to the supplemental financial information we have provided on our website at www.Investor.Allscripts.com that we hope will aid you in understanding our results. I encourage you to access the non-GAAP reconciliation table and related explanations included to assist in evaluating comparable periods and adjustments to reconcile GAAP and non-GAAP financial metrics.

Turning now to our third quarter results. As I mentioned previously, both Allscripts and Eclipsys performed well on a stand-alone basis, as well as on a combined basis. First, as it relates to Allscripts stand-alone, total bookings for the three months ended September 30, 2010, were $112 million. Our bookings performance exceeded the high end of the range we provided on our July earnings call of between $105 million to $110 million for the three months ended August 31, 2010.

Allscripts' bookings performance continues to be led by excellent sales of our Enterprise EHR solutions, particularly hospital and health systems deploying solutions to their employed physicians.

We also saw strong add-on sales to our existing clients as they prepare for meaningful use, as well as a solid quarter of health system sponsored community programs subsidizing EHRs for their affiliated providers.

Turning to revenue and profits. Stand-alone Allscripts revenue in the third quarter was $191.7 million on a non-GAAP basis, representing 14% growth when compared to our pro forma non-GAAP revenue in the third quarter a year ago. Professional service revenue had a significant uptick in the quarter, both from increased utilization of our own resources, along with higher mix of third party consultants. Reoccurring revenue for stand-alone Allscripts totalled approximately 62% in the quarter. Allscripts non-GAAP gross profit was $104.4 million, or 54.5% of non-GAAP revenue. This represents a 50 basis point improvement over the second quarter of this year. Gross margin percentages were relatively consistent with pro forma Q3 a year ago.

Allscripts' non-GAAP operating income totaled $44.8 million after giving effect of the add-back of deferred revenue adjustment, transaction related costs of approximately $36 million incurred in the quarter, acquisition related amortization expense, as well as stock based compensation. Non-GAAP operating profit margin was approximately 23.4%, which compares favorably to 22.2% in the third quarter of last year.

Allscripts' net income was $27.5 million on a non-GAAP basis, and grew 24% over the third quarter a year ago. Please note that Allscripts' stand-alone performance excludes approximately $1.9 million after tax of interest expense, or approximately $3 million of pre-tax expense associated with the $570 million we borrowed in August 2010 to finance the 24.3 million share repurchase from our former majority shareholder. We have added such interest expense to our combined non-GAAP results for the quarter.

Allscripts' stand-alone diluted earnings per share was $0.18, again on a non-GAAP basis.

We are extremely pleased with Allscripts' stand-alone results on all fronts, including our strong bookings, solid revenue growth, good margins, and overall solid execution given all the activities we were managing related to the merger as well as the related debt and equity transactions.

Turning now to stand-alone Eclipsys. Bookings were approximately $104 million, or approximately $363 million on a year-to-date basis, which represents a 26% increase for the first nine months of 2010. We remain confident that Eclipsys' 2010 bookings will be within the 20% to 30% growth range previously communicated to the market by Eclipsys management previously. Please note we have, and intend to maintain, Eclipsys' historical booking definition for the balance of 2010.

We were particularly pleased with the third quarter sale of the Mercy Memorial Hospital System that we announced this morning, and that Glen discussed earlier. This sale, we believe, illustrates the future direction of the company in the beginning of what we see as a clear market opportunity for both stand-alone and combined solutions.

Finally, we do intend to provide booking results for Eclipsys stand-alone in the fourth quarter. However, beginning with our first quarter 2011 results, we intend to consolidate to a single bookings number for the combined Company, as has been Allscripts' policy historically. We will also conform Eclipsys's booking definition to the historical Allscripts definition starting in Q1.

Eclipsys non-GAAP revenue on a stand-alone basis was $137.4 million for the third quarter, after adding back approximately $6.7 million in deferred revenue adjustments as a result of purchase accounting.

For those of you who have followed Eclipsys historically, we have consolidated the revenues as follows -- Eclipsys periodic software and hardware revenues are now being combined with Allscripts' system sales; Eclipsys professional services are being combined with Allscripts' professional services; Eclipsys reoccurring revenue attributed to maintenance is being combined with Allscripts maintenance revenue, and, finally; the remainder of Eclipsys reoccurring revenue, specifically outsourcing and remote hosting, as well as subscription and SaaS agreements, are being combined with Allscripts' transaction processing and other revenue.

For quarter, total Eclipsys reoccurring revenue was approximately 71%. Revenue mix for stand-alone Eclipsys in the third quarter, under its prior method of reporting, was nearly identical to that in the second quarter of this year.

Turning to profits, Eclipsys non-GAAP gross profit was $56.4 million, or 41%. As you can see in the non-GAAP reconciliation table in the press release, as well as in the supplemental data, we have conformed Eclipsys' historical gross margin to correspond to Allscripts gross profit definition for all historical periods presented. Eclipsys non-GAAP operating income totaled $18.2 million. Non-GAAP operating margin was 13.2%, which compares favorably to 10.1% in the third quarter a year ago. The increase in operating margins is a result of the sustainable benefits of the Eclipsys project drive cost reduction initiative.

As we stated pre-merger, we plan to achieve cost synergy benefits for the combined companies that will be incremental to this effort, which has largely reached its objectives.

Eclipsys net income was $11.2 million on a non-GAAP basis, and grew 36% over the third quarter last year. On a per share basis, stand-alone Eclipsys earnings per share was $0.19, again on a non-GAAP basis.

So, consistent with our enthusiasm regarding stand-alone Allscripts performance, we are equally pleased with the financial performance of Eclipsys in Q3, and we are even more excited about the future prospects of the combined business.

Please keep in mind that beginning in the fourth quarter we will focus on our combined results. Again, with the exception of bookings, which we intend to report separately for the fourth quarter.

For those of you new to Allscripts, we historically have provided backlog for our business, and believe this is an important metric for investors to track in terms of assessing our visibility to future revenues.

We ended the third quarter with approximately $2.6 billion in backlog, once you give effect to the addition of Eclipsys' backlog. Specifically, 85% of our combined backlog relates to future revenue for multiple years, reoccurring source, including maintenance, subscription contracts, outsourcing engagements, remote hosting contracts, as well as transaction processing fees. We categorize our backlog into the following buckets -- Software and related professional service represents approximately $403 million of our reported backlog; Subscriptions and SaaS backlog is approximately $588 million; Maintenance fees represent approximately $766 million of our reported backlog. This amount consists of 12 months of maintenance fees for legacy Allscripts clients and multiyear maintenance fees that are contracted for by Eclipsys' clients.

Finally, we ended the quarter with approximately $835 million of transaction backlog fees, which principally consists of Allscripts transaction fees expected to be recognized over the next 12 months, as well as contracted revenue for remote hosting and outsourcing services over the contracted period.

Turning to a few consolidated income statement items. Combined research and development expense totaled approximately $38.5 million in the quarter, or approximately 12% of non-GAAP revenue of $329 million. Capitalized software totaled approximately $16 million, or 42% of gross R&D spend in the quarter. Software amortization totaled $8.1 million, yielding a net capitalization rate of approximately 20%. This capitalization rate is consistent with the significant investment we are making to ensure our products are ready for the final certification in meaningful use rules. We expect our software capitalization rate to come down in 2011.

Allscripts non-GAAP effective tax rate on consolidated basis was approximately 39% and we expect that to continue for fourth quarter. Shares outstanding for the combined company on a non-GAAP diluted basis were 194.5 million in the quarter, and reflects the addition of roughly 59 million shares issued in the Eclipsys merger, and is net of approximately 30 million shares as a result of the repurchase from our former majority shareholder, plus the impact of the dilutive restricted securities.

Turning to our balance sheet. Allscripts ended the quarter with approximately $120 million in cash and marketable securities. Also, as you are aware, in conjunction with the repurchase of approximately 30 million shares in August, Allscripts entered into a credit agreement for a $470 million senior secured term loan facility as well as a $250 million senior secured revolving facility. We initially borrowed a total of $570 million to finance the share repurchase.

Again, I'm pleased to report that in September we repaid approximately $40 million of the initial amounts borrowed. As such, as of September 30, we have approximately $530 million of borrowings outstanding. We are highly confident in our ability to continue to pay down this very manageable amount of leverage, based on the strong free cash flows of our business.

Also, in order to manage our interest rate risk, in late October we entered into an interest rate swap agreement with notional amount $300 million, which declines over four years. The swap results in the LIBOR variable interest component of our debt to be fixed at 0.896% for a portion of our debt, bringing our total interest rate on that portion of the debt to 3.896%.

Accounts receivable, net for the combined company, totaled approximately $308 million, which equates to day sales outstanding, or DSOs, of approximately 86 days, which is generally consistent with the historical levels for both companies.

Finally, we ended the quarter with approximately 5,300 employees for the combined company. We do not anticipate a material increase in our total head count for the remainder of 2010.

Let's now turn to guidance. We elected this quarter to provide guidance for the fourth quarter 2010, given the change in our fiscal year and in order to clearly provide investors with a basis for understanding our 2011 guidance. Allscripts does not intend to provide quarterly guidance going forward. Rather, we will simply provide brief comments on our annual guidance each quarter, as is consistent with our prior practice. With that said, for the fourth quarter of 2010 we anticipate non-GAAP revenue in the range of approximately $332 million to $337 million. Non-GAAP operating income of approximately $63 million to $66 million, which equates to non-GAAP operating margin of approximately 19%. We anticipate non-GAAP net income of approximately $34 million to $36 million, and diluted earnings per share of $0.18 to $0.19.

Our guidance assumes interest expense which includes amortization of debt acquisition costs of approximately $6.7 million in the quarter, a tax rate of approximately 39%, and diluted shares outstanding of between 194.5 to 195 million shares.

Turning to our calendar year 2010, as well as 2011 guidance provided in the press release, I did want to emphasize that the guidance reflects both our shift in fiscal year to a December 31 fiscal year, as well as contemplates a full year of reported results from both Eclipsys and Allscripts for both years.

So, finally turning to 2011. We do anticipate revenue in the range of approximately $1.425 billion to $1.45 billion, non-GAAP operating income of approximately $303 million to $308 million, which equates to non-GAAP operating margin of approximately 21%. We anticipate non-GAAP net income of approximately $167 million to $176 million, and diluted earnings per share of between $0.85 to $0.89.

Our guidance contemplates interest expense of between $24.5 million to $26.5 million, a tax rate of between 38% to 39.5%, and diluted shares outstanding of approximately 197 million.

Allscripts guidance for 2011 reflects revenue growth in the range of 10% to 12% over calendar 2010, operating margin of 21% and diluted earnings per share growth of 16% to 22%, again over calendar 2010. All on a non-GAAP basis. Our guidance also contemplates our commitment to deliver at least $25 million in cost synergies during 2011. Our cost synergy estimates remain unchanged for 2012 and 2013, at $35 million and $40 million, respectively.

Please note this guidance compares favorably with our outlook we discussed on the day we announced the Eclipsys transaction. Specifically, our two to three year financial outlook of 8% to 10% revenue growth, Non-GAAP operating margin of 20% plus, and non-GAAP diluted earnings per share growth of 15% to 18%.

In summary, we are very excited about the future prospects for the Company. Our progress on the integration front, as well as the long term growth opportunity, as you can see, given the detailed outlook we have provided today. Thanks again for your participation and I will now turn the call back over to Glen for a few closing remarks.

Thanks, Bill. Great stuff. These are extraordinary times in health care, demanding extraordinary vision. We have succeeded in executing what we believe is a bold strategic move that positions us to take advantage of the current health care climate and the significant opportunities ahead of us.

We're well on our way to making Allscripts the clear choice for health care organizations of all sizes, and creating the connected community of health that we all believe will become the new operating system for health care, with our goal being better health for patients.

I want to close the call today by thanking our clients, who give us the opportunity to serve them, thanking our employees, who make it happen day in and day out, and thanking all of our shareholders. With that, we'll now take your questions. Thanks very much.

(Operator Instructions)

Your first question comes from Atif Rahim from JPMorgan. Your line is open.

Yes, could you give us more color on what you've baked into 2011 from revenue synergies? And then secondly the split between SaaS and regular bookings for the core Allscripts business?

Sure Atif. I'd be glad to. As it pertains to 2011 guidance, I would say that there's a modest amount of revenue synergy contemplated in this guidance. It is based on specific pipeline opportunities that we see and, again, confident in our ability to deliver on it.

We've talked to the market about a even more substantial cross-sell opportunity, and as we pursue that and realize it, I would echo a sentiment I stated before -- that would represent upside to what we've conveyed previously. There is a modest amount of baked-in to the guidance we've given.

As it pertains to SaaS mix, in large part because we continue to see a large percentage of our sales through the enterprise portion of our EHR offering, the mix, the SaaS mix in the quarter I think was just over 20%. And so a little bit lower than what we'd communicated previously, but fairly consistent.

Okay. I guess for just a push on the revenue synergies a little bit, by "modest," you mean a $10 million range, or any numbers around that? Just to give us some idea of where we should be planning for that number.

I'd really hesitate to quantify it, other than to say that it's contributing and it's substantiated by what's actually in our pipeline. But, beyond that, I really don't want to get into specific metrics that we'd have to report ongoing forward.

I'd just add that we feel great about where the merger is taking us. That said, we're still learning. We're 60 plus days in, and we're still evaluating the pipeline. We're looking at a lot of new opportunities. But I agree with Bill. I think it's too early to start quantifying those revenue synergies, although we know they're there.

Your next question comes from Corey Tobin from William Blair and Company Your line is open.

Thanks for taking the questions. Let me hit three quick ones if I could. First, Bill, on the backlog coverage, you mentioned $2.6 billion in backlog. Can you give us -- as you think about that $2.6 billion number -- what number of that do you expect to be recognized in 2011?

Sure. Taking it component by component, I would expect a large percentage of the software-related and related-professional-service amount of $403 to come in over the next 12 months. I see the subscription-in-SaaS component of $588. I would still anchor that in a four-plus-year takedown.

The maintenance is where it gets a little tricky, because legacy Allscripts we used to only capture the portion that we'd expect to come in the next 12 months, and we've added to it the contractual commitments that Eclipsys had over multiple years. So, I'm going to guesstimate a little bit, but that average takedown, Corey, I would put probably in the 3.5-to-four-year range. Realistically.

And then, finally, on the transaction fees, in a similar fashion for the next 12 months on Allscripts, but again there are contractual commitments that go well beyond that. So, for modeling purposes, I'd be comfortable with similar takedown of 3.5 years to four years.

Your next question comes from Larry Marsh, from Barclays Capital. Your line is open.

Just maybe a little bit more clarification on the bookings for Eclipsys. Bill, remind us the differences in definition between your bookings in Eclipsys and imply a pretty wide range for the fourth quarter. How do we think of that range, given the substantial differences there?

Sure. The booking definition difference principally centers around maintenance -- inclusion of maintenance. It's really important to note that Eclipsys in their definition of bookings -- many of those arrangements do entail multiple year commitments on the maintenance front. And, so, have appropriately contemplated it in their reported amount.

Historically, Allscripts has excluded such amounts, in part because many of the legacy Allscripts arrangements allowed for annual renewal and we didn't want to get that backlog ahead of ourselves in terms of contractual client commitment.

So it really centers principally around maintenance definition, but again I would just reemphasize that Eclipsys has a lot of multiple-year commitments on the maintenance front.

In terms of -- I'm a little confused by your question on the fourth quarter only because I did not give bookings guidance in the fourth quarter. The range that I spoke to was revenue-specific. And just trying to get back to my comments. So, in the fourth quarter, I talked about revenue range of $332 million to $337 million, so a $5 million range. Some of the things that would influence the high end of the low end is really a mix consideration; i.e., how many of our sales come in that are immediately recognizable into revenue. I.E., more professional sales versus enterprise sales and the like.

But I think with the quarter guidance of $5 million range, I think that's fairly reasonable and fairly tight.

Your next question comes from Charles Ryhee from Oppenheimer. Your line is open.

Thanks for taking the questions. Bill, just looking at the R&D expense, I think you said that the combined was like $38 million. And you gave the $16 million for the capitalized software and then the amortization of $8.1 million. If I net that out, does that mean like on a non-GAAP, R&D expense was around $30.6 million?

Yes, those are all non-GAAP numbers that reflect the combined performance of both businesses for the whole period. So I think that's the proper math.

And then, real quickly, as we think about the next year guidance in terms of the interest expense, what kind of assumptions do you have for debt paydown for the year?

Yes, we have assumed fairly modest paydown. There are minimum requirements that have been disclosed to the market. And so it's literally give or take for the range we've given a difference of just doing the bare minimum that's required per the agreement up to another $25 million.

So, quite frankly, to your point, there's an opportunity to favorably influence that as the business generates more free cash flow. To the extent we were to pay down quicker, that will obviously have a positive benefit on the expense and resulting net income.

The total amount, to be more specific I think, is in the range of about $45 million to $50 million, if I recall correctly, in terms of what's baked into our thinking.

Your next question comes from Richard Close from Jefferies and Company. Your line is open.

Congratulations on a good quarter after the merger.

Glen, I was curious. You had mentioned community health systems and then becoming a client. I was wondering if you could talk a little bit about that exactly -- What we're talking about in terms of what they're actually implementing from you guys?

Sure. Let me talk in just generalities. We're talking about implementing ambulatory electronic health records with community health. And so that's what we're talking about. It's the product outside not any hospital products.

Your next question comes from Frank Sparacino from First Analysis. Your line is open.

Glen, can you just talk about the product strategy? I guess, a road map over the next 12 months, particularly on the ambulatory side, at, the low end of the market in terms of what is the preferred product? What products are you supporting, et cetera?

Sure. I'd be happy to. We gave very clear guidance after some exhaustive analysis, making a decision between what had been legacy Eclipsys's Peak product and legacy Allscripts's MyWay product. And frankly that was most influenced by the sales rate, which is MyWay which is selling very aggressively. Based on that, based on both products being good solid products, but MyWay selling much more quickly, both inside existing clients and outside. We decided to go forward with the MyWay product.

That said, we wanted to be very careful with how we treated the existing Peak clients who had bought from Eclipsys because they're now part of the family. So, what we did was we said to them, one, we would get the Peak product RS certified. That was number one. Number two, we would give them the ability to exchange Peak licenses for MyWay licenses. And, that said, while it was anybody who just selects one product is never really happy to see it switched over, this was a reasonably limited number of folks. And we think we've done the right thing by them and are working with transition. Some are going to get first-year RS certification under Peak and then switch over to MyWay. And others have already decided to switch to MyWay as the go forward strategy.

That decision, always a tough decision, but an important one and it helps to drive the synergies that Bill talked about. Which is, we had very little overlap across the two companies, and in the cases where we did, we made very rapid, quick decisions to decide on a product strategy to alert our clients to it and move forward.

(Operator Instructions) I would also like to remind everyone to please limit your questions to one and one follow-up question. Your next question is Greg Bolan from Wells Fargo. Your line is open.

This is Greg Bolan from Wells Fargo. As we think about what is embedded in your revenue guidance, 10% to 12% growth, Bill, should we still be thinking that system sales should grow 15% to 20%? And now that you are actively trying to penetrate the larger physician practices employed by installed ECOSYS hospitals, should we assume that the SaaS mix and bookings should continue to decline below that 30% mark over time?

Directing your first question, I absolutely believe that the overall growth of the business will be led by system sales. In part because there will remain a component of our reoccurring revenue that will grow at a lower rate, simply due to the legacy nature of that revenue stream.

I'd hesitate to give specific guidance in terms of that line item. But I'd say you're thinking about it absolutely the right way.

In terms of the SaaS mix, I continue to believe that as we see the medium-to-low end of the market become a larger percentage of the buying decisions, which we have said repeatedly that as we move into 2011 into 2012 we absolutely expect that that will occur, and we're starting to see indications that in fact will occur. We think that SaaS will be attractive to that sub segment of the market.

So on a percentage basis, the 20% I made reference to on the physicians side I still believe will go up over time.

Your next question comes from Richard Close from Jefferies & Company. Your line is open.

Just a follow-up on Larry's earlier question with respect to the Eclipsys bookings. They had put out 20% to 30% year-over-year growth, and you had 105% in this quarter. The range there implies for the fourth quarter I guess, 105% to 144%. Can you comment on that spread on Eclipsys?

Yes, okay. Thank you for the clarification, Richard. I misunderstood the question, obviously.

He is absolutely right. And, quite frankly, the wide spread is indicative of a few large transactions that are orders of magnitude that could cause that spread to come to fruition.

So, Glen touched on a transaction that was an international deal that moved into the fourth quarter. There was one other domestic deal that -- that moved in the fourth quarter that is effectively done now as well. That is in our estimation going to contribute to a very solid fourth-quarter performance. But the spread in terms of what it implies on the bookings front is really just indicative of one or more enterprise deals, whether or not they hit in the quarter or effectively move into the first part of next year.

Okay, thank you.

Your next question comes from Bret Jones from Brean Murray. Your line is open.

Thank you for taking the questions. In the commentary, Bill, you talked about both companies meeting their financial goals in the quarter. When I think about Eclipsys's stand-alone revenue guidance for the full year, it was somewhere in the neighborhood of $559 to $569, which would imply a pretty sizable ramp in Q4, getting up to $159 million in the quarter. Are you still sticking with that? Is that reasonable to expect them to be able to achieve that kind of ramp?

My comment was specific to, again, the expectations that we had for both businesses coming through the due-diligence process. Quite frankly. By virtue of the nature of their bookings year-to-date, and the fact that much of that was related to transactions that are going to be recognized over a multiple year period, we knew that Eclipsys, on the revenue front, it was going to take some time to effectively ramp.

I'm not prepared to reaffirm what they had said specific to revenue guidance for the year.

I would refer you back to the guidance we've given on a combined basis for the full year, and what that implies for the fourth quarter. Which we quite honestly believe it conveys reasonable performance in the fourth quarter. That's what I would point you to. I can't speak too explicitly what they said and how that would reconcile to the fourth quarter.

Okay. And then just a quick question on the backlog mix. When we talk about the software and professional services, historically, that backlog mix has been two-thirds software and one-third professional services. Has that materially changed, with the inclusion of the Eclipsys backlog?

Not materially. It did inch up a little bit in terms of greater percentage of professional services. What was two-thirds, one-third, maybe think about closer to 60/40. It's still relatively close.

All right. Thank you.

Your next question comes from Gene Mannheimer from Auriga . Your line

Thanks, nice quarter, guys. Can you offer, Glen, what level of integration currently exists between Sunrise and Touchworks, certainly realizing its early post merger? And what's planned for 2011? Can we get to a single database, a single-instance type of integration, or will it continue to be one of interfacing? And then second question for Bill -- What level of stock-based compensation is contemplated in Q4 and for 2011? Thank you.

Sure. Let me take the first piece of that and then Bill will take the second.

The integration levels will vary by the three different electronic health records and also by the client. As we mentioned when we announced the merger, there are clients like Columbia Doctors, Columbian Presbyterian in New York City, where they are already moving back and forth seamlessly between the Sunrise application and our Enterprise application. And they've done that at an object level, at a high level. But from a physician standpoint, they see that as providing their needs.

Second, we talked about the fact that at the Eclipsys user conference, we already demonstrated round-trip functional integration between Sunrise Clinical Manager and a professional product.

But the real issue here is people want a single patient record. They're less concerned -- you won't hear doctors talking about single database or the technology or functional integration or object level. They simply say, "I want one view of the patient. I want a single patient record."

And the way we do that at the new Allscripts is inside we have a fully integrated application. And outside the four walls of the organization, we use semantic interoperability. And we bring that all together in one single patient record. And that's what is unique about the offering.

If you own everything, you can probably do that with multiple applications. But 90% of healthcare in America is mix and match. They don't own all the physicians who refer to them. You saw some great examples of that in the clients that we talked about. They use a lot of affiliated and referring physicians, and our offering gives them the best of both worlds and ultimately results in one single patient record.

The other thing I draw your attention to is we talked about having the first level of this accomplished by the end of the first quarter. And we believe that most physicians are going to be very satisfied with that. We'll get further on as time goes on. But, again, you really have to think about a single patient view, a single patient record, and the ability to connect the inside and the outside of the organization. That's going to be the big differentiator. Because people who are on a vertical siloed application, who try to force a hospital-based application on a community, it just isn't going to work.

And we see some very big operations who embrace some of our competitors come to us to work with the community and to connect it all together. And we think that's the future of this market for the 90% or 90% plus of the market that is focused on an integrated offering.

Long answer, ultimately. It's about a single patient record, it's connecting the inside and the outside. It's connecting to those 50,000 practices that we have that nobody is going to build overnight. And it's about giving physicians who are outside the four walls of the hospital easy-to-use applications. And when they're inside the four walls of the hospital, there's no software better or more sophisticated than our Sunrise Clinical Manager application, none whatsoever.

Yes, to answer your question. Gene, I would refer everybody to the footnotes that are part of our press release. We lay all these assumptions out in detail. The answer to your specific question -- Calendar 2010 contemplates approximately $28 million in pre-tax stock-based compensation. And based on our current thinking right now, 2011 is approximately $19 million to $20 million. Again, it's all spelled out in the footnotes to the press release.

Thank you, guys.

Your next question comes from George Hill from Citigroup. Your line is open.

Thanks for taking the questions. Bill, as you think about 2011 for the Eclipsys and Allscripts on a stand-alone basis. It looks like that the margin expansion profiles for either one of the segments might have slowed down just a touch. I guess so -- and I want to ask that respect to -- so $25 million is the synergy guidance that you guys are standing by for 2011? And has anything changed in the margin profile of either of the businesses?

George, I don't see that in terms of our respective bills. Taking the $25 million of cost synergies into account, we absolutely believe that there's going to be reasonable margin expansion in both legacy businesses into 2011. And it's contributing, in terms of the combined business, going from 19% to 21%. If you do the math -- you can't get there just by virtue of the $25 million of cost synergies.

So, I don't see anything substantively in terms of the stand-alone models that would give you reason to believe that there's slowdown there. I think you have to be cognizant of the fact, as it pertaining to Eclipsys, that they had a concerted effort this year on project drive that is not replicating itself next year. But, again, that wouldn't contribute to a reversal. And, again, so we're comfortable with the expectations on both businesses.

Okay. That's a fair consideration. Glen, maybe one more strategy question. As you guys look at the combined businesses going forward, how are you thinking about portfolio rationalization? Eclipsys had some lower margin businesses. Do you think there are businesses you might choose to stay in, or might choose to exit? And, at the margin, what is the appetite for small Paquin acquisitions to round out the portfolio?

We're very pleased with the portfolio today in terms of where we were. We've done some rationalization in terms of go-forward, as we already mentioned, the decision between Peak and MyWay. And how we're embracing going forward from a unity standpoint, connectivity standpoint, dbMotion as our go-forward strategy. So from that perspective we feel like we have what we need.

If your look at our approach to the market now, the way we think of it is -- one, we have a combined offering and you saw that from Mercy, where they're buying the inside and the outside, connecting it all together.

Second, we have a cross sell. You saw that at Bronx Lebanon. And that is, they had Sunrise and they're adding some of our tack-on products that are very high margin for us.

Third, you have fast implementation, you saw that demonstrated at UHS, where 100% of the ER went to CPOE on day one. I'd remind everyone on the call that we are far and away the leader in CPOE in the entire market, and Eclipsys has been the leader for eight years running now. So that's the most useable software.

And last, but not least, is community. And you saw that at St. Charles. Where, we're adding thousands of physicians where these hospitals and health systems are embracing the community, and kind of connecting with those affiliated and non-affiliated physicians, and making it easy and subsidizing the purchase. And remember, we have more hospitals than many of our competitors. That strategy works for us as well.

So, combined offering, cross sell, fast implementation and community. And that's how we're going forward. We think we have what we need.

Thanks for taking the question. I appreciate the color.

Your next question comes from Stephen Shankman from UBS. Your line is open.

Great. Thanks for taking the question. I was hoping to get some more color on the pipeline, and specifically as it relates to the combined acute and ambulatory deals. I know it's somewhat early here, but what do the combined opportunities look like in terms of the number and the size of the tickets? And also assume that the average field-size prospects are now bigger? And any color you could give would be helpful. Thank you.

I'm going to share this question with Bill because it's tough. At one level, obviously, if you go out and sell a large hospital system, those are very big deals. At another level we see expansion in the community. And those are smaller deals, and those typically can be softwares and services, so they can be spread out over a five-year period. So we're trying to balance those out.

The other thing is, the larger deals are less predictable than the community offerings, which we're banging out every quarter and that's more like a machine that's going forward. So I think we feel like we've got good balance in the pipeline. We have different groups, different sales teams focused on different units. And what we haven't done is when we put the companies together, we still kept those people who sell stand-alone acute systems, they're still selling stand-alone acute. We have other people who are still selling stand-alone ambulatory to small physician practices.

We of course have our distribution network with great names like Henry Schein and Cardinal and Synnex and others.

And then we have a new unit that's combined that goes in and says "We'll sell you the entire suite. " We did that to make sure we didn't lose a step in selling any of our existing products, while we expanded and broadened the market to the new sectors of the integrated offering that MacKenzie and others have identified so clearly as being a huge upside opportunity.

I wish I could be a little more clear, other than to say that in each one of those sectors, we see great opportunity. Which one expands the fastest, and how it impacts the average deal size, I almost think is less important than making sure that in each sector we make good progress and we win more than our fair share. Bill I don't know if you want to add--

I think it was very well put.

Your next question comes from David Larson from Leerink Swann. Your line is open.

Yes, previously you provided a statistic about 40% EMR penetration rate for practices with 26 or more docs. Within the Eclipsys-installed base, would you say that that 40% penetration rate is roughly accurate as of right now, which would obviously infer an significant insell opportunity?

I think there's dramatic opportunity to sell within the Eclipsys base, whether it be large hospitals that have not made their ambulatory decisions. We've now made it easy for them to go with an application that they know will be fully integrated, and very quickly.

But we're also seeing demand, as was evidenced by some of the deals we announced, for our home care products and our post-acute care products and our connectivity products as well.

So I think you're going to see demand kind of across the board on that as well.

I would just make two observations, and we've always prefaced the statistic that you're referring to, the fact that while they've made a EHR decision, the prospect that there could be a replacement market is very real.

And the point being is that you have some of these hospitals that thought they were going to lean on their incumbent hospital provider to effectively fill that need. And what we're seeing is an opportunity -- to go into Glen's point -- to go in and not only have a potential EHR sell opportunity, but also the incremental sale in terms of the other product offerings that we bring to bear.

So, in some respects, in terms of how the Eclipsys base is feeding into that statistic, many of them feel they had a solution. Whether it's what they real need in terms of meeting the needs, and is there an incremental sale opportunity for us? We see opportunities that suggest that we will have a cross sell there.

The second point is, when we quantified for the market the cross-sell opportunity of $1.25 billion, what I said to the market, a couple times now, is that within the $800 million of selling our solutions into the Eclipsys base, about half of that $800 million opportunity is selling our EHR into the Eclipsys base. If you want to quantify kind of how much EHR opportunity, we've indicated that it's somewhere in the order of magnitude of $400 million to $500 million.

Bill makes an excellent point. There's two ways to go. There are some folks out there who say, "We have a big hospital system, we're going to force everybody in the community to use it."

We've seen that strategy not work for years. And that is big hospital vendors have had unusable systems and tried to force them down physicians' throats and it hasn't worked. And now some of them have said, "we'll just buy the physicians and we'll do that."

We're taking a different tack. We have systems that physicians want to use in the hospitals. But, also, that physicians are using willingly outside. And at a certain point hospitals are going to say, "It's easier if there's already thousands of practices using this system, rather than try to rip and replace, why don't we go with what's in place and why don't we use that?"

It's a little bit Apple-esque, if you think about it. Because a bunch of big corporations are now starting to say, "if everybody love serving these products, why don't we just go with them and accept them in?" We saw it happen with phones, we're going to see it happen across the board. From that perspective, we see an opportunity to win in both directions.

Why don't we -- I think that gives you an answer there. Why don't we take one more question just to be respectful of all of your time.

Your final question comes from the line of Anthony Vendetti from Maxim Group. Your line is open.

Thanks. Most of my questions have been answered, but maybe, Glen, you could talk about a little bit how the cross sell is going into the Misys practice for docs, and how that cross-sell opportunity is at this point in time?

Yes, I'm happy to. We are upgrading. The interesting thing about where we are in the space is everybody in healthcare today has to upgrade to get to meaningful use.

And so we're using that as an opportunity to go to our existing Misys base and give them the opportunity to not only upgrade their practice management systems, but also their electronic health record. And we see that as going very well.

Again, we've taken a very client-centered approach to say, "You don't have to do it. We're not going to force you. But we're going to make it very easy if you want to upgrade to any of our latest technologies and make sure you qualify for the RS stimulus dollars." And we see a good opportunity to do that.

How many docs right now within the 110,000 Misys docs have an EHR? And how many so far have you sold your EHR to?

I don't think we've given breakout guidance like that before. I will tell you though that we've made, I think we have commented in prior calls, we've made significant progress against that base. And a number of those folks have upgraded to the different applications. Some of those practices are being absorbed by clients who already use the rest of our applications, so as that statistic from the Wall Street Journal showed, this is a very dynamic market. But we feel like we're very well positioned to take advantage of that full mix of products. So essentially, what we can say is whatever they need, we have it.

Okay. Great. Thanks.

Let me just conclude the call today. Again, we couldn't be more excited about our positioning today of where we are in healthcare. It's a market in transition. The Federal Government is investing billions of dollars. And they're giving those dollars to folks who buy electronic health records and other solutions we sell.

And whether you're looking for an integrated offering inside the four walls of the hospital or looking for an offering that closes the gap and connects, the healthcare equation to create this connected community of health, that we think is the future, either way, Allscripts is the answer. And we're seeing that in terms of our sales results.

Again, the time is now. We're less than 60 days away from the measurement period where people start to measure to get their dollars from the Federal Government, the first payment. And we couldn't be more excited about the opportunity, how the integration is going, and again, a lot of kudos to our folks who are making it happen.

So thanks for joining us on the call and we'll look forward to talking with you next quarter. Thanks very much.

This concludes today's conference. You may now disconnect.